Today, both employers and governments are faced with budgetary limitations to meet growing medical needs and rising costs. There is the expectation that employee benefit plans should supplement government healthcare plans even more. However, employers cite the rising cost of benefits as their number-one HR concern. In fact, 57% of employers who responded to the Morneau Sobeco 2004 Compensation Trends and Projections Survey indicated that the increasing cost of benefits is a key issue.
All research points to the constant preoccupation of plan sponsors with the need to control the cost of benefits plans. Canadian Health Care Trend Survey Results 2004, conducted by the Mellon Financial Corporation, indicate that during the four-year period between 2001 and 2004, claim costs for private healthcare rose on average 15% per year and dental care claim costs rose on average 8.5% per year.
The steady increase in the cost of prescription drug and disability coverage and cost shifting from public to private plans have been major contributors to these trends. While few employers have assumed total increases, many have increased employee contributions or have made plan design changes, such as increasing deductibles and co-payments. Cost constraints will likely lead to predictable expenses such as vision care, orthodontics and possibly all dental care to be excluded from traditional benefits plans due mainly to the higher costs associated with these benefits.
HSA SOLUTIONS
HSAs should also be considered effective tools for managing costs. Employers have mostly implemented HSA plans to enhance traditional benefits plans either for all employees or for selected groups. While traditional plans provide coverage for defined benefits at a cost that is always subject to change, HSAs allow employers to provide coverage for a broader range of medical expenses while giving them control over the cost of funding these plans.
However, HSAs provide more than just a cost control strategy. They positively impact employee morale. While traditional group plans may be viewed as being paternalistic as they provide defined benefits to plan participants, HSAs give plan members a deeper sense of control in making decisions that affect their own health. The employer is perceived as a facilitator by making a defined monetary contribution to the HSA. This leaves employees to take the time to understand their benefits plans, leading to a better appreciation of the costs involved and, therefore, placing them in a position to make wise choices in the use of benefits that apply to their specific situations. HSAs may even serve to attract and retain high-calibre employees, leading to low turnover rates and an overall positive view of the employer.
It is also important to consider HSAs as a means of addressing the challenges presented by the profile of today’s workforce, which is quite different from what it was years ago. Many companies now have a broader demographic spread in their workforce, higher turnover rates and wider ranges of professional classifications resulting from merged companies with multiple lines of business. This presents a diversity of health benefits needs in the workplace that requires innovative solutions.
HSAs can offer cost-effective benefits solutions that provide real value to a workforce with diverse needs; they can open the door to offer solutions while retaining tax advantages to both the employer and employees. More employers can consider the introduction of HSAs in their employee benefits packages in the following ways.
Plan Design – Coupling an HSA with a traditional benefits plan could allow employees to pay out-of-pocket expenses such as deductibles and amounts in excess of the maximum under the traditional plan from their HSA. Items not covered under that plan, and which are suited to the particular needs of the employee and his or her dependents, would also be paid out of the HSA. The employer may choose to limit the range of benefits under the traditional plan and then use the cost savings to fund the HSA account.
In some cases, the HSA may turn out to be the primary benefits plan. This type of arrangement could work particularly well in companies with a wide demographic spread, with different types of operational units and with offices in different geographic regions.
Value-added features – Since HSAs make employees responsible for managing their own health benefits, employers have the opportunity to educate employees on the prudent use of their HSA credits as well as provide a wide range of useful, value-added information, such as lists of frequently prescribed drugs and their generic equivalents, paramedical service providers in surrounding areas as well as eligible medical expenses. This differs from information usually provided with traditional plans which focuses only on benefits offered.
HSAs provide taxation advantages to both employees and employers. HSA benefits payments are not subject to federal income tax. Quebec taxes HSA benefits, which can be included in the medical expenses tax credit. Furthermore, in computing business income, the employer can deduct reimbursements for eligible medical expenses and applicable administration fees. However, taxation advantages are restricted by a number of factors: the employer’s financial capacity to fund the plan and Canada Revenue Agency legislation—which states that the plan must qualify as a plan of insurance—and under which unused credits are returned to the employer at the end of the plan year or carry-forward period. Under this legislation, employees lose non-taxable dollars. As well, there is no real advantage to an employee using payroll deductions to contribute to an HSA, since the employee is taxed on the gross amount of salary paid, including the amount withheld through payroll deductions for employee-funded credits.
POTENTIAL HSA INNOVATIONS
Modifications to tax rulings should be considered in order to allow potential innovative features to HSAs. One proposal would allow individuals to contribute before tax to their employer’s HSA plan to augment the funds available in the HSA without any taxation penalties or risk of losing their unused contribution. Also, an employee could, prior to forfeiture of the employer’s contributions, transfer his contribution and possibly his employer’s contribution to an individual health and long-term care investment account. Funds in that account could be accrued over time and then used for medical and long-term care at a specified future date; for example, when the employee retires. Any funds withdrawn for medical reasons would not be considered as income for tax purposes. It is likely that employees would willingly contribute to their HSA plan; according to the 2004 Aventis Healthcare Survey, eight in 10 employees say they would pay more than they currently do for their health benefits.
In recent years, new prescription lifestyle drugs(e.g., nutritional supplements)have been introduced and health and wellness services are being actively promoted. Although in most instances, these services are not considered medically necessary under the law, greater awareness and demand for these services by employees should be accommodated by allowing for the addition of a lifestyle account component to the HSA. Employees should be aware that the services available under this lifestyle component would be considered a taxable benefit.
Finally, Canada Revenue Agency legislation stipulates that employees must be the recipients of HSA reimbursements; service providers cannot be paid directly from an HSA. If this legal restriction were to be rolled back, it would then be possible to provide employees with an HSA debit card to facilitate payment directly to the provider from the participant’s HSA. In fact, HSA debit cards are now widely used in the United States.
Governments, employers and employees must face the reality of the future. Our governments are faced with budgetary limitations to meet growing medical needs and rising costs. Employers are faced with global competition and must limit, if not reduce, operational costs. Employees are willing to pay and invest to ensure current and future access to the best healthcare services. The case has been made for HSAs to provide innovative solutions: as a supplement to public health plans, as a cost-control measure for employers and as a means of providing valued benefits for employees. Governments, industry groups and employers must now give serious consideration to reforming legislation to allow for more flexibility in HSA plan design.
Camille Isaacs-Morell is manager, marketing and strategy, group insurance for The Standard Life Assurance Company of Canada in Montreal. camille.isaacs-morell@standardlife.ca
